JPMorgan’s Kolanovic Sees This Year’s Early Equity Rally Fading
Bloomberg · 31 Jan 2.3K Views

(Bloomberg) -- JPMorgan Chase & Co. strategist Marko Kolanovic believes that stock investors should fade this year’s equity rally on expectations that markets will likely move lower in the coming months as recession risks build.

“We believe investors should fade the YTD rally as recession risks are merely postponed rather than diminished,” a team of strategists led by Kolanovic wrote in a note to clients. He continues to see downside risk for the stock market since the Federal Reserve will likely keep interest rates high for some time as the economy is slowing and corporate earnings are weakening.

Kolanovic’s team reiterated what JPMorgan’s Mislav Matejka wrote in a note to clients on Sunday, saying “fundamental confirmation for next leg higher might not come,” with the first three months of the year likely marking a “turning point” for markets with “no Fed pivot in sight.” As a result, markets could encounter even weaker earnings growth through the second and third quarters of 2023.

“A weak trajectory for US domestic demand keeps recession risk elevated, even as the tightness in labor markets postpones this recession risk,” Kolanovic wrote. “Meanwhile, restrictive real policy rates represent an ongoing headwind, keeping the risk of a recession later in the year high.”

One of Wall Streets biggest optimists through most of the market selloff last year, Kolanovic has since reversed his view, cutting his equity allocation in mid-December due to a soft economic outlook this year. Earlier this month, the bank reduced its recommended equity allocation once again due to fears of a recession and central-bank overtightening.

“Unless the Fed starts cutting its nominal policy rates, these restrictive real policy rates would represent an ongoing headwind, keeping the risk of an eventual recession later in the year relatively high,” Kolanovic added.

Most of the strategist’s calls didn’t work out last year, with his his bullish S&P 500 price target of 4,800 coming in about 25% higher than where the equities benchmark ended 2022. The bank’s 2023 year-end target for the S&P of 4,200, suggests a roughly 4% gain from where it currently stands. Kolanovic, however, did urge investors to buy the dip in China equities during their October downturn, a call he got right as the MSCI China index has gained more than 30% since early October.

Editor: Callie